Credit Crunch

In the earlier part of the year, as my company has some extra funds sitting around and not doing anything, I decided to put them in fixed deposit. Some of my friends recommended putting it in Australian dollar fixed deposit instead due to the much higher interest rate compared to Singapore dollar fixed deposit. It just so happened that my corporate account's bank relationship manager called me to ask me if I'm interested in investing my company's excess funds so I took up the offer to meet up.

During the meeting, I was introduced to a new commodity investment fund that they were introducing - oil! As the investment period required was about 2 to 5 years, I decided not to as I can't tie-up my company's funds for such a long period. In retrospect, it was a real fortunate decision even though the predicted return was much higher!

After I told the relationship manager and her colleague of my intention of just simply putting the excess funds in short term Australian dollar fixed deposit, the bank introduced to me dual currency deposit instead. She highlighted to me the flexibility and advantages of doing so. My fund would still be invested in Singapore dollars but getting Australian dollar fixed deposit rate. I would not suffer any loss due to foreign exchange. There wasn't even management fees and commission. It sounded like a really good deal. As long as during the one month period while my fund is invested, the trading band of the 2 currencies (Singapore vs Australian) is within a certain band, my fund would remain in Singapore dollar and earn the interest rate of the Australian dollar fixed deposit.

It sounded like a very good investment plan.

For the next 6 months, my fund was getting an interest rate of average of 5% per annum. All this while, the Australian dollar was strengthening against the Singapore dollar. Some time in August, Australian dollar weakened against Singapore dollar and my company fund was converted to Australian dollar. When it was converted, it was at a rate near its high and as some of you may know the Australian dollar has weakened about 30% against Singapore dollar since then. My company fund is now in Australian dollars.

Similarly, my company fund would lose about 30% of its original value if I convert it back to Singapore dollar from its current Australian dollar status.

Assuming I had invested a sum of $500k, the 30% forex loses would translate to an absolute sum of $150k! Ouch! I am not about to realise the loses. I am of course gonna hold on to the funds in Australian dollar as long as I can and wait till the Australian dollar to strengthen against Singapore dollar again. Even though I've made $150k of paper loss, $500k of my company fund is now "untouchable" and effectively out of the money system. (Note: The figure used above is only for illustration purpose.)

No wonder we have a credit crunch now. A lot of monies must have been trapped and have become "untouchables".

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A while back, my staff just complaint to me her husband's company was not going to give any bonus this year. Her husband works in a well-known MNC. In fact, the company just announced that they have a record-earning financial year. Understandably, her hubby and his colleagues were shocked and angry when their HR announced that there won't be any bonuses this year.

Now that I run my own company, I can understand the rationale of the MNC's decision. Next year is going to be a very challenging year. The signs are there. In fact, for the month of December, my company has received payments totalling only $24,010. This amount the lowest amount of payment received for the whole of 2008 and is way below our operating cost so I'll be making a loss this month. It is not that we don't have business, it is just that due to the credit crunch, many of my clients are not making their payments in a timely manner.

As such, I was also considering to conserve the company's fund and not giving any bonuses this year even though on paper, we had a record year. It was fortunate that we had a record year and thus we'll be able to keep more funds in the coffer and hopefully tide us a very tough looking coming year 2009. It is really tempting.

In the end, I relented and decided to give my staff 3 months (inclusive of 13th month bonus) of bonuses and not giving myself any bonus this year. I hope the decision does not come back to haunt me in the future.

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Afterthought

Only now then I realise my investment was an investment in forex and forex was one of the most high risk and volatile trading tool. I learnt it from my own painful personal experience. Not in one time did my relationship manager ever highlight to me that my investment was high risk. I had assumed that my investment was similar to fixed deposit in a foreign currency. Never did my relationship manager corrected my assumption as she and her colleague just kept their silence when I made a wrong assumption. However, truth be told, if they had highlighted the risk involved in any investment, I doubt anyone would want to invest at all. One of my friend told me that I should have done my homework but if I had been able to do my "homework" and understood all the technical terms and theories behind the investment, I wouldn't need the services and advise of any relationship manager or fund manager to help me invest, would I?

This lies the dilemma between the seller and buyer of any financial tools.

However, this is not a post about blaming the banks and the financial institutions. Seriously, I went in with my eyes opened. I should have remembered the adage of "the greater the returns, the greater the risk". If the returns of my investment was guaranteed, wouldn't everyone be putting money in the sure-win investment tools already? Exactly because it isn't a sure bet, there will always be profit and loses.

Of course, there definitely is a group of people who had been misled during the course of the sale. Obviously, this is a group of "investors" who are not sophisticated and they shouldn't be introduced to the complex investment tools due to their educational level and language abilities to comprehend the complex investment tools.

For me, I think I've only myself to blame.